Advanced Management Accounting

Order Description Reading case and answer question C CASE This is a fictitious case - the focus is to apply your knowledge from the course to the scenario. You can undertake research into the industry but it is not required. Healthy Drinks Ltd (HD) is a South Australian based company, specialising in the production of 100% real fruit smoothies which are not processed or pasteurised in any way. The business is run from the 'Healthy House' headquarters in the northern suburbs, where a state-of-the-art production facility is sited and where all of the employees are located. Company history The business incorporated and started trading on 1 January 2013, with the entire shareholding being held equally by the two founders, Stuart Chen and Jane Griffiths, who are also the only directors. Initial finance was provided as follows: ? Stuart and Jane had both made large bonuses in their previous employment and invested $150,000 each as equity ? Bank finance was obtained through a $450,000 loan for 10 years. Interest is at 8% per annum, secured by personal guarantees on the directors' properties and a $200,000 overdraft facility. ? In 2014, Stuart introduced a further $200,000 as a long-term loan - money that had recently been inherited. It was agreed that interest would be payable at 4% per annum. Most of the investment has been made in securing a long term lease on the plant and in purchasing high-tech equipment. HD?s accounting system consists of some rudimentary spreadsheets put together by Stuart, who has a background in hospitality, not accounting, and the only involvement of qualified accountants is in terms of preparing the company?s tax returns and Business Activity Statements. No formalised performance evaluation or incentive system currently exists. Most packaged fruit drinks in the industry (including other 100% smoothie products) are pasteurised, a process which heats the juice for a short period before cooling it rapidly. This process makes the shelf life longer but some (including Stuart and Jane) argue that many of the nutrients and enzymes in the smoothie are destroyed, as well as detracting from its flavour. Stuart and Jane considered but also rejected using another type of pasteurization process, HPP, for the same reasons. Other smoothie products are made from concentrated juices and some use preservatives. Healthy's range of fruit smoothies consist of 100% pure fruit bought direct from growers with no preservatives or additives added. Initially all production was sold fresh and chilled. The product is cold pressed in small batches in order to minimise oxidisation during bottling and high tech containers are used to ensure the product lasts as long as possible. However, despite this, the shelf life is still only 4 days, and all chilled products are sold in and around the Adelaide region. Due to the practicalities of distribution Stuart and Jane were willing to make one ?compromise? which was to freeze some of the product in order to enable distribution further afield, but this has had only modest success since it was launched in 2015. In the early days of production during 2013 Stuart worked long hours in the factory with only 2 other employees to assist him, whilst Jane worked on the vital promotional side of the business. Now (in 2016), the factory has 15 workers and Stuart rarely has time to visit the production line. Jane now has three sales and marketing staff working for her and the company also employs two administrators and two bookkeepers. As HD's products are not pasteurized, all the production equipment has to be completely sterilised and the juice has to be kept chilled at every stage of the process. Despite this, there has been one instance of a batch becoming contaminated and a product recall was required after a customer was hospitalized following consumption of the product. Whilst this incident was isolated, Stuart and Jane are concerned that with the growth of the company, their ability to monitor the production process is more limited and that sometimes employees may not be following all of the detailed hygiene procedures. In addition, there have been instances where too much has been manufactured, which resulted in spoilage due to the limited shelf life. Healthy's fruit suppliers are located primarily in Australia, although using imported fruit is necessary at some times of the year, where regulations allow. The company aims to use only the highest quality fruit. Healthy tries to foster an entrepreneurial environment and welcomes new ideas and suggestions from staff and customers. All new recipes are tested on family and friends and members of the public passing by Healthy House. Not all new ideas are implemented. HD's mission statement is 'to make smoothies that are healthy and that people will enjoy drinking. They will be produced in as socially and environmentally friendly a way as possible'. So, as well as public approval, all new products have to fulfil the following criteria: ? Great tasting ? Simple ? 100% pure ingredients ? Healthy Healthy have introduced the concept of 'seasonal blends,' each only available for three months. This allows them to take advantage of the best quality fruit at the cheapest prices when it is ?in season?. In the first year, many of the products ?sold? were in fact given away or sold at heavily discounted prices in order to stimulate interest in the product. At the end of their first year the firm signed deals with a number of small chains of sushi bars and cafes, which agreed to stock Healthy drinks in their shops. Since then, Healthy have experienced rapid growth and their drinks are also stocked across a range of local independent convenience stores. A major reason in convincing local stores in and around Adelaide to accept the fresh product with such a short shelf life lies in the local knowledge and marketing know-how of Jane, who has a background in food marketing in South Australia. However, even she has so far been unable to persuade the major supermarkets to take on either the chilled or the frozen product. The short shelf life of the chilled product makes it incompatible with the supermarkets storage and distribution systems and they have not yet been convinced by the less conventional frozen smoothie product, which has proved less of a hit with consumers than the fresh version. As the business grew, HD were unable to distribute the product themselves and at the end of 2014 they signed a contract with an independent distributor, Chiller Solutions Ltd (CS), who specialise in cold food and drink logistics. Once the drinks leave the Healthy factory, they are transported by CS direct to the stores, sometimes by-passing retailer?s internal distribution centres because of the very short shelf life. HD places high demands on CS in terms of frequent, small deliveries because of the short shelf life of the fresh product. Stuart and Jane are becoming concerned by their reliance on CS, who have recently indicated that they are likely to increase their charges. Strategic plans The directors share the same personal objectives. Their primary aim is to continue working for themselves, doing something that they enjoy and believe in, which they hope will provide them with a comfortable living. They are in the business for the long term and currently have no plans for an exit route. Now they have had a taste of success, Stuart is keen to: ? open a chain of Healthy smoothie bars to complement the packaged product ? increase sales of the frozen product by getting it stocked in the major supermarkets ? open up production facilities in Melbourne and Sydney to enable distribution of fresh smoothies in those cities. Stuart says ?We cannot stop now we have shown we can penetrate this market ? we need to invest now to sow the foundations for future success?. Jane is more conservative. She favours gradual growth, and has suggested that the company focuses on the local South Australian market in their core product of fresh chilled smoothies. She comments ?We have to accept that our key source of competitive advantage is in having a fresh, unprocessed product. Although we have grown rapidly we may now we reaching our limits as a niche provider in just one region. We should focus on the fresh not the frozen smoothies and because of the shelf life limitations, remain concentrated on the South Australian market.? Both continue to share the same vision though: 'We don't want to be like the big companies. Whatever we do, we must make sure that our growth does not stop us staying true to our brand and our promise of 100% quality, but we wish to continue to operate as an informal, open and ethical company.' Question C: What implications does the firms? rapid growth and strategy have on the type of Management Control System (MCS) and Management Accounting System (MAS) that may be most suitable for HD? Provide examples of some of the detail that should be included in the firm?s MCS and MAS.